Software-as-a-service market booming [The Gazette, Colorado Springs, Colo.]
(Gazette (Colorado Springs, CO) Via Acquire Media NewsEdge) April 18--Most software is moving to an Internet-hosted model, and companies selling that software must be structured far differently from firms that sell applications installed on a user's computer, according to a California entrepreneur who founded three successful software startups.
Internet-hosted software companies, called software-as-a-service providers, have greater initial cash requirements than traditional software firms so they can build up the information-technology infrastructure needed to offer their applications through the Internet and generate cash flow on a periodic basis instead all at once at the purchase, said Dave Key, owner of Cloud Strategies, a software-as-a-service consulting firm. He was the founding CEO of FileNet, a content management software company acquired by IBM, as well as FieldCentrix and YouMail.
"Customers are choosing software-as-a-service because it lowers the total cost of ownership and they can access their data anytime, anywhere," Key told about 30 local entrepreneurs and business owners at a breakfast hosted Wednesday by the Colorado Springs Technology Incubator. Technology industry analysts estimate that the software-as-a-service market will grow from about $12 billion in sales last year at a compound annual rate of between 21 percent and 28.5 percent during the next several years, he said.
Software-as-a-service has four common characteristics -- it is virtual, pay-as-go, offered to multiple users and can be expanded, Key said. To be successful, firms offering software-as-a-service must keep their sales cost per customer at a level that they can recover in periodic payments within six months, lose no more than 10 percent of their customers annually and be able to generate enough cash flow to recover what they are paying for the equipment and broadband capacity needed to host their applications, he said.
Besides lower up-front costs and wider access to their data, software-as-a-service customers spend less on information technology, have fewer operational issues, eliminate spending on periodic upgrades to software, only pay for what they use, can easily try new features and get upgrades immediately, Key said. Drawbacks can include concerns about data security, limited availability, spending more of software over the long term, viability concerns about their provider, reduced ability to customize and difficulty in integrating with other applications.
"To sell software-as-a-service, there must be more of a pull from the customer than a push from the vendor. The customer is doing more of the sales effort, but that requires that the vendor must provide more information to the customer so they can make the decision to buy," Key said. "However, vendors must also realize software-as-a-service customers are not as locked in and it is easier for the customer to switch (vendors) than it is with legacy software" installed on the customer's computers or servers.
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